UPDATE: Chen has reportedly been offered a fellowship at NYU that China will allow him to pursue. More to come.

BEIJING — China said on Friday blind dissident Chen Guangcheng could apply to study abroad, suggesting an end may be near to a diplomatic crisis that has soured relations between Beijing and Washington.

But some sounded a note of caution over expectations of any quick way out for Chen, who is being kept in a Beijing hospital, with China’s leaders worried that appearing to be soft could embolden other challengers to Communist Party rule ahead of a power handover late this year.

The announcement by the Chinese Foreign Ministry followed a dramatic and very public appeal by Chen, who spoke by phone to a U.S. congressional hearing on his case, asking to be allowed to spend time in the United States after fleeing 19 months of extra-judicial captivity in his home village.

“Chen Guangcheng is currently being treated in hospital,” ministry spokesman Liu Weimin said in a brief statement.

“If he wants to study abroad, he can apply through normal channels to the relevant departments in accordance with the law, just like any other Chinese citizen.”

The crisis erupted last week when Chen sought refuge in the U.S. embassy. He stayed there for six days until Wednesday when U.S. officials took him to a Beijing hospital after assurances from the Chinese government that he and his family would receive better treatment.

But within hours, Chen, 40, had changed his mind, scuppering what had seemed to be a delicately constructed deal between Chinese and U.S. diplomats to allow him to receive treatment for a broken foot and be reunited with his wife and two children.

Chen remains anxious about his future and the fate of family members who apparently helped his escape and were detained by authorities in the rural eastern province of Shandong.

Shortly before the ministry announcement, Chen told Reuters: “My situation here is not very good. I’ve just found out that when friends have come to visit me, they’ve been beaten up.

“As well, for two days I haven’t been able to meet U.S. embassy diplomats. They came here, but they weren’t allowed inside to meet me. I think this situation is very bad.”

The issue has cast a shadow over this week’s visit to Beijing by Secretary of State Hillary Clinton for talks intended to improve ties between the world’s two biggest economies.

Putting on a brave face, she told Chinese President Hu Jintao on Friday ties were the strongest they had ever been. But Beijing has publicly accused the United States of meddling in its affairs.

Chinese human rights lawyer Tang Jitian cautioned that the authorities could easily hold up the paperwork to delay Chen leaving the country. China’s security forces might not be as keen as its diplomats for a quick exit.

“This notice from the Ministry of Foreign Affairs is positive news, but how it will play out we don’t know. For instance, getting the approval for the paperwork to go, there are many potential pitfalls,” said Tang. “We can’t be 100% optimistic.”

Despite the tension over Chen, China did agree in the talks to moves to further liberalize its capital markets, a senior U.S. official said.

STARBUCKS-SIPPING TROUBLEMAKER

One of China’s main official newspapers accused Chen of being a pawn of American subversion of Communist Party power and described U.S. ambassador Gary Locke as a backpack-wearing, Starbucks-sipping troublemaker.

“Chen Guangcheng has become a tool and a pawn for American politicians to blacken China,” the Beijing Daily said.

Chen, in translated comments, also told the congressional hearing that villagers who had helped him were “receiving retribution” and he was most concerned about the safety of his mother and brothers.

“I’m really scared for my other family members’ lives,” he said. “They have installed seven video cameras and are in my house.”

His village remained under lockdown. Guards chased away two Reuters reporters who attempted to enter the village on Friday. The four heavy-set guards ran slowly, yelling at the reporters as their car drove away.

U.S. DEFENDS HANDLING OF CASE

U.S. officials have defended their handling of the case, but Republicans and Chen’s supporters were critical, saying the White House must ensure Chen’s safety.

Chen, who campaigned against forced abortions under China’s “one-child” policy, sought refuge in the U.S. embassy after escaping from house arrest in a village in Shandong on April 22.

Republican presidential candidate Mitt Romney said if the reports were accurate, the U.S. embassy failed to put in place the kind of verifiable measures that would ensure the safety of Chen and his family.

The Chen case also comes at a tricky time for China, which is engaged in a leadership change later this year. The carefully choreographed transition has already been knocked out of step by the downfall of ambitious senior Communist Party official Bo Xilai in a scandal linked to the apparent murder of a British businessman.

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